Another All-Time Low for Popular Volatility Bet

By Brendan Conway

The most heavily used exchange-traded note tied to the “fear gauge” is down again. And its leveraged cousins have already lost 25% in the New Year.

The Barclays iPath S&P 500 Short-term VIX Futures ETN (VXX) touched a fresh lifetime low today on a split-adjusted basis. As it happens, that’s not very newsworthy. Fresh lows occurred repeatedly last year due to the way this ETN is built. It buys volatility-futures contracts that are priced persistently high and sells out of others that have been persistently low.

In dramatic bursts of market volatility, when the volatility-futures curve deviates from the normal pattern, its price will rise. But over time, its value declines, much like an options contract. Read here and here for more explanation why. The VXX is already down 13% in 2013.

The leveraged versions of the same index, the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the VelocityShares Daily 2x VIX Short Term ETN (TVIX), are down by roughly 25% apiece in 2013.

Bill Luby at VIX and More has a post explaining why 2012 was such a winner of a year for traders who made the opposite bet of these trading vehicles, with products such as the VelocityShares Daily Inverse VIX Short Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY).

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There are 6 comments

JANUARY 4, 2013 3:14 P.M.

Both Sides of Your Mouth wrote:

Wait a minute, didn't you just post an article yesterday saying "shock" was still to come? I'm confused!

JANUARY 4, 2013 3:15 P.M.

Brendan Conway wrote:

Why do you assume that I endorse MKM's view -- those are the "shock" guys -- if I write about it on the blog?

JANUARY 4, 2013 3:35 P.M.

velocity2012 wrote:

WHAT? You were thinking chit runds up hill?

JANUARY 7, 2013 8:01 A.M.

do your own due diligence ppl wrote:

Sorry to say but Imho this article is a promo for xiv and svxy.To be credible you must at least give some insights or outlook of the sp500 of which these volatily etfs and etns track.You cant do one without doing the other otherwise you will loose your credibility.Everyone knows that vxx uvxy and tvix hit new lows.It's no news but pure fearmongering.What many ppl do not know is what's next.Btw incase you forgot;xiv and svxy last year hit all-time highs from the date of inception and they are on the verge of collapse.What goes up must go down and vice versa.Always look at the other side of the coin.

JANUARY 14, 2013 6:46 A.M.

Jim wrote:

"do your own due diligence ppl," I completely disagree with your comment that SVXY is on the verge of collapse. Although it does carry certain risks, the odds are stacked in the favor of SVXY - that ETF is designed to profit over time from contango, which should cause SVXY to continue to rise over long periods of time despite periodic corrections.

JANUARY 23, 2013 1:59 P.M.

master of pain wrote:

the only thing we have to fear is the VXX them selves-to try and guess the future of the world and then tranlate that to a call on the VXX can be like predicting the end of the world-a job for a crazy person -

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As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.